Fitch Rates Deutsche Bank's Additional Tier 1 Securities 'BB+(EXP)'

(The following statement was released by the rating agency)
LONDON, May 02 (Fitch) Fitch Ratings has assigned Deutsche Bank
AG's
(A+/Negative/a/F1+) upcoming issue of undated non-cumulative
fixed to reset rate
additional tier 1 securities of 2014 an expected rating of
'BB+(EXP)'.
The final rating is contingent on the receipt of final
documentation conforming
to information already received.
KEY RATING DRIVERS
The notes are additional Tier 1 (AT1) instruments with fully
discretionary
coupon payments and are subject to a write-down if Deutsche Bank
breaches a
5.125% Basel III common equity tier 1 (CET1) ratio. The trigger
ratio is
calculated on a 'phased-in' basis under the EU capital
requirement regulations
(CRR).
The notes are rated five notches below Deutsche Bank's 'a'
Viability Rating
(VR), in accordance with Fitch's criteria for "Assessing and
Rating Bank
Subordinated and Hybrid Securities". The notes are notched down
twice for loss
severity to reflect the write-down on breach of the trigger, and
three times for
relative non-performance risk.
The notching for relative non-performance risk reflects the
notes' fully
discretionary coupons, which Fitch considers the most easily
activated form of
loss absorption.
The issuer will not make an interest payment if the payment,
together with
payments made on other Tier 1 instruments, exceeds available
distributable items
adjusted for interest expense on Tier 1 instruments, or if the
authorities or
legislation prohibit the bank from making payments.
The bank calculates its available distributable items under
German GAAP for the
parent bank. The available distributable items include net
income and movements
from capital reserves ('balance sheet profit') and free capital
reserves and
retained earnings. Under the German commercial code, certain
amounts related to
intangible assets, deferred tax assets and pension assets cannot
be distributed,
reducing the available distributable items. At end-2013, the
amount available to
Deutsche Bank for distribution to AT1 holders amounted to about
EUR2.7bn. German
accounting standards allow the issuer to influence the amount of
distributable
items somewhat (e.g. through dividends upstreamed from
subsidiaries), and Fitch
expects the bank to manage its balance sheet profit to ensure
that sufficient
amounts are available to make interest payments on the AT1
instruments.
The 5.125% trigger is on a phased-in basis, but even on a fully
applied basis
the bank has a sizeable buffer above this trigger. Deutsche
Bank's fully applied
Basel III CET1 ratio stood at 9.5% at end-March 2014 providing a
EUR16.2bn
buffer above 5.125%. However, we believe that loss absorption
would occur before
a breach of the 5.125% trigger in the form of non-payment of
coupon, which under
Fitch's criteria would be considered as non-performance. The
agency expects
Deutsche Bank to become subject to capital regulations'
restrictions on
distributions, including distributions on AT1 instruments, if
and when it
breaches its combined buffer requirements.
The requirement for Deutsche Bank to maintain capital buffers
above the CRR
minimum requirements will be phased in from 2016 and is likely
to result in a
combined CET1 ratio requirement of at least 9% by 2019. At
end-March 2014,
Deutsche Bank's buffer to a 9% fully applied CET1 ratio was a
fairly low
EUR1.7bn, but we expect the bank to increase this buffer
significantly given its
commitment to achieve a 10% CET1 ratio by end-March 2015. We
also believe that
the combined buffer requirements for banks could change over
time and that
additional buffers, for instance in the form of counter-cyclical
buffers, could
be introduced.
Fitch expects Deutsche Bank to maintain sound capital ratios
that provide a
sufficient buffer to avoid restrictions on interest payments on
AT1 instruments
given these instruments' importance for the bank. The bank has
stated that it
remains committed to achieving its target fully applied Basel
III CET1 ratio of
above 10% by end-March 2015 and that it would not exclude a
capital increase to
achieve its target. The agency also expects that the bank will
manage the amount
of available distributable items, which can be affected by
management's decision
on dividend payments from subsidiaries, so that coupon payments
will not be
prohibited if sufficient free capital resources are available
within the group.
Fitch has assigned 50% equity credit to the securities. This
reflects their full
coupon flexibility, the permanent nature and the subordination
to all senior
creditors.
RATING SENSITIVITIES
As the notes are notched down from Deutsche Bank's VR, their
rating is primarily
sensitive to any changes to this rating. Failure to improve
underlying earnings
in 2014 would put Deutsche Bank's VR under pressure (for more
details on the
main sensitivities see 'Fitch Revises Deutsche Bank's Outlook to
Negative on
Support Expectations; Affirms at 'A+'', dated 26 March 2014 and
available on
www.fitchratings.com).
The notes' rating is also sensitive to any changes in notching,
which could
arise if Fitch changes its assessment of the notes'
non-performance risk
relative to that captured in Deutsche Bank's VR. This may
reflect a change in
capital management, including capital management under German
GAAP at the parent
bank, or an unexpected shift in regulatory buffers, for example.
Contact:
Primary Analyst
Michael Dawson Kropf
Senior Director
+49 76 80 76 113
Fitch Deutschland GmbH
Taunusanlage 17
60325 Frankfurt am Main
Secondary Analyst
Anna Deineko
Associate Director
+44 3530 1538
Committee Chairperson
Gordon Scott
Managing Director
+44 20 3530 1075
Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153,
Email:
hannah.huntly@fitchratings.com.
Additional information is available on www.fitchratings.com
Applicable criteria, "Assessing and Rating Bank Subordinated and
Hybrid
Securities", dated 31 January 2014, and "Global Financial
Institutions Rating
Criteria," dated 31 January 2014, are available at
www.fitchratings.com.
Additional Disclosure
Solicitation Status
null/gws/en/disclosure/solicitation?pr_id=828597
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS
LINK:
here. IN ADDITION,
RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE
ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS,
CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S
CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE
FIREWALL, COMPLIANCE
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE
FROM THE 'CODE OF
CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE
SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES.
DETAILS OF THIS
SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH
WEBSITE.